Often, overwhelming public opinion is absolutely correct. This week’s news has been dominated by the NBA’s banning of LA Clippers owner Donald Sterling over the outrageous and inexcusable privately recorded comments he made about African Americans. All of the NBA teams already have gone on record in support of Commissioner Adam Silver’s decision to ban Sterling for life. This is as it should be. Racial animosity is an inherent evil which defies any extremist attempts to rationalize or justify such behavior.

In other circumstances, however, the media sways public opinion in a direction that ignites conflict. Conflict, of course, is the basis for every good story. Michael Lewis’ recent book, Flash Boys, paints a picture of a “rigged” US stock market, where exchanges conspire with high-frequency traders to cheat retail investors. A survey published last week suggests that his argument may be gaining traction. According to a survey conducted by ConvergEx Group LLC, which provides brokerage and trading-related services, 51 percent of respondents said that high-frequency trading is harmful or very harmful, and 70 percent said that the US equity markets are not fair for all users. Mr. Lewis would have us believe that high-frequency trading, including algorithmic and computer-based trading, is inherently evil and that there is no place for any reasonable disagreement with that view.

But it’s not complicated to discern the difference between words or actions that are inherently bad and those that are not. On Tuesday, US SEC Chair Mary Jo White, testifying before the House Financial Services Committee, said that the markets “are not rigged.” She acknowledged, however, that the SEC must continue to combat the appearance of unfairness. Ms. White stated that high-frequency trading is “clearly an issue that we’re quite focused on.” The FBI, the US and New York Attorneys General and the CFTC, in addition to the SEC, all have confirmed that they are investigating the practices of high-speed trading firms. Ms. White believes that there is confusion regarding the difference between early access to order information and the ability of certain firms to react more quickly to publicly available information.

It is too soon to be able to determine whether the Commissioner’s reasoned and cautious approach to policy on high-frequency trading will sway public opinion. Despite Lewis’s allegations, however, speedy trading “is not unlawful insider-trading” and is not an inherent evil. Modern traders who use currently available and developing technologies need to rally together to help set the course for a rational regulatory and legislative agenda. The public would be wise to consider what actions or statements are completely incapable of justification versus conduct the consequences of which are far less obvious. Some members of Congress have noted that high-frequency trading is a very complicated and multidimensional issue which is not easy to understand. The point is that certain conduct is so extreme and outrageous that a swift, definitive response is necessary and appropriate. Other conduct, however, is not so clear cut, despite the claims of those who may have an incentive to vilify such conduct - not least benefiting from the controversy they are stirring up. It is not that difficult to see the difference.

News from the Americas

JOBS Act apps. According to CFO.com, two new internet applications have been introduced that may assist companies interested in effectively employing the US Jump Start Our Business Startups Act’s general solicitation and crowdfunding rules. (4/24/2014) JOBS Act.

CSA proposes guidance for proxy advisory firms. The Canadian Securities Administrators published for comment proposed “National Policy 25-201 Guidance for Proxy Advisory Firms.” The proposed policy is intended to address concerns related to conflicts of interest, transparency and accuracy. The CSA proposal takes a policy-based approach, providing guidance on recommended practices and disclosure for proxy advisory firms to promote transparency in the services they provide to clients and to foster an understanding among market participants about proxy advisory activities. Comments should be submitted by June 23, 2014. (4/24/2014) CSA press release.

Canadian government proposes hybrid pension model.Reuters reported that the Canadian government is proposing a new voluntary pension plan to address concerns that the country’s current private pension model is not sustainable. The proposal presents a hybrid defined benefit and defined contribution plan. (4/24/2014) Pension proposal.

Raw material exchanges approved for Shanghai. According to Bloomberg BusinessWeek, China has approved the establishment of eight exchanges in the Shanghai free-trade zone, which will be allowed to trade in iron ore, metals and energy. (4/24/2014) Raw materials exchange.

APEC consults on multilateral framework for managed funds. The Asia-Pacific Economic Cooperation passport working group (Australia, Korea, New Zealand, the Philippines, Singapore and Thailand) released a consultation paper on proposed arrangements for a multilateral framework to facilitate the cross border marketing of managed funds across participating economies in the Asia region. Comments should be submitted by July 11, 2014. (4/16/2014)

ASIC review of OTC electricity derivatives market. The Australian Securities & Investment Commission published its findings after its review of the written risk management policies of Australian financial services licensed entities that trade in over-the-counter derivatives in the wholesale electricity market in Australia. (4/17/2014) ASIC press release.

News from Europe

Stress test scenarios. The European Banking Authority and the Bank of England separately announced the release of their respective methodologies and macroeconomic scenarios for their 2014 stress tests. The EBA 2014 EU wide stress test methodology and assumptions cover a wide range of risks including: credit and market risks, exposures towards securitization and sovereign and funding risks. (4/29/2014) EBA press release. The UK stress test will be run alongside the EBA’s EU-wide exercise. The Bank of England will add a number of additional UK layers to the EBA stress test (UK variant), which explore particular vulnerabilities facing the UK banking system. The Bank of England will publish the results of its stress test towards the end of this year. (4/29/2014) Bank of England press release. The European Central Bank informed banks how capital shortfalls must be addressed following the comprehensive assessment. (4/29/2014) ECB press release.

FCA advisory on pension transfers. The UK Financial Conduct Authority advised firms of requirements with which they must comply when giving advice on self-invested personal pensions. (4/28/2014) FCA advisory.

UK opens money laundering investigation. The Director of the UK Serious Fraud Office announced the opening of a criminal investigation into possible money laundering arising from suspicions of corruption in Ukraine. The SFO has obtained a restraint order freezing approximately US$23m of assets in the UK in connection with this case. (4/28/2014) SFO press release.

European stress tests.Bloomberg discussed the upcoming bank stress tests required by the European Banking Authority and the European Central Bank. The advance scenarios will be the toughest yet. (4/28/2014)

The implications of MiFID 2.The Economist noted the implications of MiFID 2, which aims at improving trading transparency in all asset classes and on all venues.(4/26/2014) MiFID 2.

ECB publishes SSM framework. The European Central Bank published the framework for the Single Supervisory Mechanism. The ECB will assume full responsibility as banking supervisor for the SSM on November 4, 2014. The identification of significant banks, which will be subject to direct supervision by the ECB, will take place according to criteria set out in the SSM Council Regulation and further developed in the SSM Framework Regulation. The result of this process is due to be announced in September. (4/25/2014) ECB press release.

UK PRA supervisory statement for general insurers. The UK Prudential Regulation Authority issued a supervisory statement setting forth its expectations of general insurers in relation to the calculation of technical provisions and the use of internal models. The statement expands on the PRA’s general approach and seeks to ensure that firms set an adequate level of technical provisions and hold sufficient capital. (4/25/2014) PRA press release.

ESMA updates credit rating agency performance data. The European Securities and Markets Authority published its latest set of semi-annual statistical data on the performance of credit ratings, including transition matrices and default rates. This latest dataset covers the period from July 1, 2013 to December 31, 2013. (4/22/2014) ESMA notice.

ECB credit terms survey results. The European Central Bank published its findings from its March 2014 qualitative survey on credit terms and conditions in euro-denominated securities financing and over-the-counter derivatives markets. (4/17/2014) ECB press release.

Bank of England issues supervisory statement. The Bank of England issued a supervisory statement to insurance firms that will be subject to Solvency II (SII) and set out the Prudential Regulation Authority’s expectations of firms in relation to the recognition of deferred tax in SII. (4/16/2014)

Global Regulators

Regulators discuss cross border derivatives. Citing anonymous sources, Bloomberg reported that the US Commodity Futures Trading Commission, the Hong Kong Securities and Futures Commission and other national regulators met with the International Organization of Securities Commissions to discuss the regulation of cross border derivative transactions. (4/29/2014) Cross border meeting.

FSB and IOSCO make G-SIFI comments available. The Financial Stability Board and the International Organization of Securities Commissions published the responses they received to their January 2014 consultation entitled “Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions.” (4/25/2014) Comments webpage.Bloomberg summarized the comments submitted by investment firms. (4/28/2014) Responses.

FSB publishes comments to derivatives trade repository consultation. The Financial Stability Board made publicly available the comments it received in response to its consultative document “Feasibility study on approaches to aggregate OTC derivatives trade repository data.” (4/17/2014) Comments webpage.

IOSCO studies corporate bond markets. The International Organization of Securities Commissions published a Staff Working Paper entitled “Corporate Bond Markets: A Global Perspective.” The report presents findings from a study on the development and functioning of corporate bond markets globally, and focuses on both emerging and developed markets. (4/15/2014) IOSCO press release.

US Securities and Exchange Commission Developments

Proposed Rules

Books and records rules for security-based swaps. The SEC published for comment new rules for security-based swap dealers and major security-based swap market participants. The proposed rules address recordkeeping, reporting, and notification requirements for security-based swap dealers and major security-based swap participants and would establish additional recordkeeping requirements for broker-dealers to account for their security-based swap activities. Comments should be submitted by July 1, 2014. (4/16/2014) SEC Release No. 34-71958.

Staff Guidance

Well-known seasoned issuers. An updated policy statement concerning when the Division of Corporation Finance will grant a waiver of ineligible issuer status for well-known seasoned issuers has been published. The update discusses what constitutes “a showing of good cause” for purposes of an ineligible issuer waiver request. (4/24/2014) Policy statement.

Compliance and Disclosure Interpretations. New Compliance and Disclosure Interpretations have been issued by the Division of Corporation Finance. The new CDIs concern the satisfaction of legend requirements via hyperlink under the proxy and tender offer rules and schedules (New Question 164.02); communications not deemed a prospectus (New Questions 110.01 and 110.02); offers made in connection with a business combination transaction (New Question 164.02); and conditions to permissible post-filing free writing prospectuses (New Questions 232.15 and 232.16). (4/21/2014) CDI.

Selected Enforcement Actions

Acquisition target’s CEO engaged in insider trading. The SEC filed settled insider trading charges against the former CEO of a company being acquired by eBay. The SEC also charged five others and entered into a non-prosecution agreement with a person who provided extraordinary cooperation in the investigation. This is the agency’s first non-prosecution agreement with an individual. The SEC alleges that the CEO violated a duty of trust by providing two family members and two friends with nonpublic information about the pending acquisition. To settle the charges, he agreed to an officer-and-director bar and to pay US$664,822, which includes a penalty equal to twice the amount of his tippees’ profits. In a parallel action, the US Attorney’s Office announced criminal charges against him. The others will pay a combined total of more than US$490,000 in settlements. (4/25/2014) SEC press release.

SEC issues stop order for sales under amended registration statement. The SEC issued a stop order to prevent Comp Services Inc. from issuing stock after it included false and misleading information in its amended registration statement for an initial public offering. The stop order prevents Comp Services from selling privately held shares to the public until the company has corrected the misleading information. The stop order finds that Comp Services failed to disclose the identity of the control person and promoter behind the company, and falsely stated that Comp Services earned revenue for providing computer services even though the company has never earned any revenue. The registration statement has been amended 10 times, most recently in December 2013. Comp Services consented to the issuance of the stop order, which also triggers the bad actor disqualifications to prohibit Comp Services from engaging or participating in any unregistered offering conducted under Rule 506 of Regulation D for a five-year period. (4/23/2014) In the Matter of the Registration Statement of Comp Services, Inc., SEC Release No. 33-9577; SEC press release.

SEC alleges investment adviser failed to disclose revenue sharing fees. The SEC has instituted contested administrative proceedings against a registered investment adviser, Total Wealth Management, Inc., its president and several advisers, alleging that they fraudulently received undisclosed revenue sharing fees from funds in which their fund of funds invested. The defendants’ Forms ADV stated that the defendants “may” have revenue sharing arrangements with certain funds, but the Commission alleged that such statements do not inform investors that the fees were already being received and fail to provide the details of those fees. (4/15/2014) In the Matter of Total Wealth Management, Inc., SEC Release No. 33-9575.

Other Developments

SEC Chair defends US markets.Reuters summarized SEC Chair Mary Jo White’s testimony before the House Financial Services Committee. Chair White told Congress that the US markets are not “rigged” and that high-speed traders are not engaged in illegal insider trading. Summary.

Political spending petition. The petition of Citizens for Responsibility and Ethics in Washington submitted a petition to the SEC requesting that the agency require public companies to disclose their political activities. (4/15/2014)

US Commodity Futures Trading Commission Developments

CTA relief from oral recording requirement. The Divisions of Market Oversight and Swap Dealer and Intermediary Oversight issued a time-limited no-action letter that provides relief to commodity trading advisors that are members of designated contract markets or swap execution facilities. The relief covers the oral recording requirement set forth in Commission Regulation 1.35(a) in connection with the execution of swaps. The relief expires on December 31, 2014. (4/25/2014) CFTC press release.

DCO receives reporting relief. A derivatives clearing organization (DCO) received relief from certain requirements relating to the format of acknowledgment letters and format and content of daily reports because it is winding down operations in anticipation of vacating its DCO registration. (4/23/2014) CFTC Letter No. 14-55.

DCMs receive time-limited clearing relief. The Divisions of Clearing and Risk and Market Oversight announced they will not recommend enforcement action against designated contract markets (DCMs) for failure to comply with Regulation 38.152’s prohibition against pre-arranged trading if, after a trade has been rejected for clearing, the DCM permits a new trade with terms and conditions that match those of the original order. The relief expires on June 30, 2014. (4/18/2014) CFTC Letter No. 14-50.

US Banking Agency Developments

GCF Repo report. The Federal Reserve Bank of New York published a two-part staff report on the GCF Repo Service. Part 1 discusses the clearance and settlement of GCF Repo and includes a summary of planned reforms. Part 2 examines how the GCF Repo Service is used. (4/23/2014) Report.

US Exchanges and Self-Regulatory Organizations

Regulatory stretch. According to Reuters, the insurance industry is objecting to a Financial Industry Regulatory Authority plan that would require brokers to disclose under certain circumstances the compensation they receive for selling insurance products. (4/24/2014) FINRA’s stretch.

FINRA wants more background information. The Financial Industry Regulatory Authority announced that its Board of Governors has approved changes to FINRA’s supervision rule that would expand the obligations of firms to check the background of applicants for registration. FINRA also plans to perform an initial search of public financial records for all registered representatives and will conduct a search of publicly available criminal records for all registered individuals who have not been fingerprinted within the last five years. (4/24/2014) FINRA press release.

GASB support fee. The Financial Industry Regulatory Authority announced it has established an accounting support fee to fund the annual budget of the Governmental Accounting Standards Board. Each member firm’s assessment is based on the member firm’s portion of the total par value of municipal securities transactions reported by all FINRA member firms to the Municipal Securities Rulemaking Board during the previous quarter. (4/21/2014) FINRA Regulatory Notice 14-17.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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